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Life Insurance as ‘Mortgage Protection’ insurance–a so-so way and a much better way to do this

09-10-2008 by Colleen King

Life insurance is life insurance, right? Many times yes, but with the right type of life insurance your mortgage will be protected in a way that affords your survivors more options.

Have you gotten a mortgage or refinanced a loan lately? About 20 minutes after the close, you started getting things in the mail offering crucial, vital protection that was absolutely essential to your existence and the existence of your family as well the continuation of liberty and freedom in America. Geez, when you put it that way……..

Often is it offered by an affiliate of the company you did your loan through, but also insurance agencies that do this type of coverage buy information and seek out public records when a new loan or re-fi closes. The idea is that you fill out the card, mail it then get a call to set an appointment. You can do that and meet with the agent, but there are some definite questions you need to know to ask.

Generally what is being offered is called ‘decreasing term’ life insurance. What you are buying is a term policy that is meant expressly to pay off your mortgage, it’s not a fixed, static amount. So, as your mortgage balance decreases, so does the amount the policy will pay if you pass away. If you are buying with a spouse or partner and you both apply, you are really paying two premiums and getting one policy, with a death benefit that decreases over time. AND, if you sell your house, usually the policy is attached to the house so you end up starting over if you are buying another home.

What about this scenario–one of you is working, the other isn’t. The working spouse dies. You have other bills, and now a loss of income. What do you do? Well, the decreasing term life policy will pay off your mortgage, but what about other expenses?

By using a regular term life insurance policy, either 20 or 30 years, you control what happens to the money. You can now address other bills and have a financial cushion. Maybe you do want to pay off the house, and you can, but what if you are now going back to work and would like the mortgage interest expense as a deduction? This is one of the things I mean by having control over your situation. If two people are insured, you have two level premium death benefits (meaning the value doesn’t drop over time). And if you move, the policy goes with you.

Optimally, you look at an amount that will pay off the mortgage, put all kids through a four year college program and take care of a majority of the remaining partner’s living expenses. That can end up being expensive, and you don’t want to buy insurance that breaks you. Once we look at rates, then we go ‘backwards’ and see what death benefit amount is affordable. After all, having something is better than nothing, because it will give your survivors time to grieve and deal with things. And not have to make difficult financial decisions at a terrible time.

Some people if they are younger will opt to add on a ‘return of premium’ rider. If you are alive at the end of the term of the policy, they will return 100% of the premium to you. No interest of course, but at least you get it back. Agents are divided on whether this is a good thing to recommend or not. I suggest it, but don’t push it, because ultimately my clients are calling the shots.

So basically, when you have people depending on you financially, whether you want to call this mortgage protection, life insurance or just good old peace of mind, seriously consider looking at it. Be well!